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Surety Bonding, Continuity and Succession Planning

Succession Planning for construction business surety bonding

Transitioning any business can be a challenge but maybe even more so in construction. You must decide whether to sell to a family member, key employee(s), or even a third party. What is the firm worth? Is the value in intangible customer relationships, industry knowledge or hard assets such as equipment? How will the new buyer pay for these things? Will there be new debt for the company, or will ownership have to buy themselves out with their own money? These are all questions that the construction company and its owners will have to answer. Unfortunately, according to the latest survey by FMI in 2017, only 22% of contractors have done formal succession planning for their business. This can be problematic for many reasons but especially to a contractor and their surety. So why would a surety bond company care about succession planning and continuity?

Personal Indemnity

The first reason why your surety bond company cares about your continuity plan is because they want to know how bonded work will get finished without you. After all, they are guaranteeing that you will complete the project and pay your bills, so what happens if you aren’t around? Usually in a sale, this is addressed in the contract. The new buyer or existing owner can have the responsibility to finish all work in progress. However, keep in mind that on a bonded job, the bond company may have the old owner’s personal indemnity. This will remain even if you sell to a new buyer. Bond companies rarely let indemnitors off in these situations. Also, keep in mind that bonded liability may not be over with the completion of a project. Watch out for maintenance provisions that may last longer. Also, a best practice would be to contact the bond company in writing after a sale and request that their indemnity be released.

Life Insurance

Remember, continuity is not just for a sale but also an untimely death or disability of a key owner. The bond company does not want to be in business with your spouse. Imagine that a key owner dies and the spouse inherits the company. The spouse has no knowledge or interest in construction but starts making key decisions. Perhaps this leads to key superintendents and people leaving the company or perhaps the new ownership starts taking out cash. These are things that could lead to financial loss for the bond company. A better practice would be to have life insurance in place for the key owner that would buy out the spouse or other owners. Additionally, consider key men or work completion agreements to be in place with your key workers. This gives the bond company comfort that they will stay around and complete the projects if something happens.

Planning Early

Lastly, the bond company will be concerned about your continuity plan because they can drain the liquid assets of the company if not done properly. One of the biggest mistakes we see contractors make is waiting too late to start the planning process. By that point, they are often forced to sell to a new buyer who must finance the transaction through bank debt. This often creates heavy leverage and goodwill on the balance sheet and can hurt the new company’s ability to bond. One potential solution to this is the SBA Bond Guarantee Program. However, a better route is to get started on planning early. MG Surety can recommend ways to handle your ownership transition without impacting your bonding. However, many of these strategies take time to execute and fund properly.

You may think your continuity planning has little to do with getting surety bonds, but you would be wrong. Bond companies are very interested in how you transition your business whether it is by planned retirement or other unplanned reasons. The best contractors start working on this early. Give us a call and we can provide ideas and solutions to help minimize the impact on your bond capacity. We want to be your bond broker for life!